Why Are Banks Suddenly Trying to Impose Monthly Debit Card Fees?

Why are banks suddenly trying to impose fees on debit cards that are used to make purchases?

Last month, Bank of America raised the ire (to put it mildly) of their customers when they announced that they would be imposing a $5/month fee on people who use their debit cards to make purchases.

The reaction was swift and severe, with many Bank of America customers promising to close their accounts. "Why are they trying to charge us for spending our own money?" was the common refrain.

Debit Card Fees - IllustrationThat's a good question - why? It's not just Bank of America that is planning on charging this monthly fee - other major banks were testing a monthly fee on debit cards in select markets, and were surely going to roll it out nationwide if there hadn't been such a strong backlash against Bank of America.

The answer to the "why?" question can be found in the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act was first proposed in December of 2009 and was signed into law on July 21st, 2010. The impetus of the Act, which implemented the most sweeping financial reforms since the Great Depression, was the "Great Recession" of 2007-2009.

The reason behind the monthly debit card fees can be found in the Durbin Amendment, which was a last minute addition to the Dodd-Frank Act.

The Durbin Amendment sought to limit the amount that banks could charge for debit card interchange fees (aka "swipe fees"). The bill sought to implement swipe fees that were "reasonable and proportional to the actual cost" of processing the transaction. Swipe fees are paid for by the merchant. Banks charge these fees every time a person pays for a purchase by debit card, which is why some merchants will refuse to process debit card transactions if they are below a certain amount.

The cap on debit card interchange fees will reduce bank revenues by roughly $10 billion/year according to some industry estimates.

Banks were looking to recoup this revenue loss through other means. One idea? The monthly fee on debit cards used for purchases.

Unfortunately for the banks, consumers are staunchly against paying such fees, so it looks like it will be back to the drawing board for big banks. Don't worry - they'll come up with something.